Russia and Tax “Black-Lists”; What are the Tax Implications?
On 14 February 2023, the Council of the European Union approved adding Russia to the EU list of non-cooperative jurisdictions for tax purposes (the "EU List") (official publication on 21 February 2023).1
In response to Russia being added to the EU List, Russia's Government announced that it is considering suspending double tax treaties with countries that introduced sanctions against Russia and that Russia regards as "unfriendly".2 Furthermore, effective 1 July 2023, all these "unfriendly" jurisdictions were added to its national "list of offshore zones" ("Russian List") by enlarging it to 91 jurisdictions in total now.3
Both, Russia's being black-listed by the EU and Russia's black-listing "unfriendly" countries, have tax implications for operations involving Russia. Below is a short overview of potential tax consequences in Europe arising from Russia being added to the EU List (with particular focus on Belgium, the Czech Republic, France, Germany, Luxembourg, Poland and Spain) as well as Russian tax consequences that are dependent upon the Russian List.
Tax Implications of the EU List
The EU List is a part of the EU's work to fight tax evasion and avoidance. It is composed of jurisdictions that are assessed as not complying with tax good governance criteria and have failed to fulfil their commitments to address incompliance within a specific timeframe or have refused to do so (called "non-cooperative jurisdictions"). Russia has been included in the EU List because its tax regime for "international holding companies" re-domiciled from outside of Russia into one of Russia's special administrative districts4 has been assessed as a harmful preferential tax regime and Russia failed to fulfil its commitment to amend this regime.
The inclusion in the EU List triggers disclosures concerning operations of EU resident companies with listed non-cooperative jurisdictions under EU Directives (as transposed where required as domestic laws):
- under the EU DAC 6 Directive,5 cross-border payments to an associated enterprise tax resident in Russia (if they constitute deductible expense for payer's tax purposes) trigger a reporting obligation irrespective of whether the transaction is aimed at generating a tax benefit (with immediate effect following the addition of Russia to the EU List); and
- under the EU CbCR Directive,6 income tax information should be made publicly available on a country-by-country basis for each EU Member State, as well as for each non-cooperative jurisdiction on the EU List, i.e. separately for Russia if applicable (starting from the financial year after 22 June 2024).
Furthermore, the inclusion in the EU List triggers restrictive tax measures and enhanced tax disclosures under national tax laws of the EU Member States; in some Member States such national measures will only be applicable after a national list of non-cooperative jurisdictions is amended accordingly. Notably, such national tax measures are typically designed to target transactions with "tax havens" which could lead to uncertainties of their application with regard to Russia. In addition, national measures and particularly their impact on the scope of application of an existing double tax treaty are neither harmonised among the EU Member States nor always clear.
In Belgium, the inclusion of Russia in the EU List bears, in particular, the following consequences:
- the mandatory disclosure of payments made by companies subject to Belgian corporate tax or non-resident tax directly or indirectly to persons, permanent establishments or on bank accounts maintained or held in Russia.7 This requirement is only triggered if the total relevant payments to all non-cooperative jurisdictions listed in the EU List made during the taxable period reach a minimum amount of EUR 100,000;
- the non-deductibility of certain expenses for Belgian companies or companies subject to non resident tax.8 Entities that do not comply with the obligation to declare foreign payments referred to above cannot deduct those payments as expenses. The same applies if the payment has been declared but the taxpayer is unable to demonstrate that it was made in the context of real and genuine transactions and with persons other than legal arrangements (construction artificielle/artificiële constructies);
- the Belgian CFC regulation automatically applies to a company established in Russia, regardless of the minimum participation or minimum taxation;9
- dividends do not qualify under the Belgian participation exemption regime if they originate from a company located in Russia;10
- an individual resident in Belgium would be subject to the tax transparency regime (so-called "Cayman tax") on the income of any Russian company of which it is a shareholder unless it can be demonstrated that Russian income tax is at least 15% of a "Belgian" taxable basis (note that the establishment of the taxable base as would have been required under Belgian tax law may lead to technical difficulties); and
- an extension of the period open to Belgian tax authorities to establish the tax liability from three years to six years where the tax declared is incorrect and a mandatory disclosure had to be made in accordance with Article 307, § 1/2, BITC referred above.11
The inclusion of Russia in the EU List alone does, however, not affect benefits from the Double Tax Treaty between Belgium and Russia in relation to taxation in Belgium.
The inclusion of Russia in the EU List has the effect on Czech controlling companies, which, when applying CFC rules, will include into their income, for purposes of taxation in the Czech Republic, all the income of the Russian controlled company. This is regardless of whether the Russian controlled company carries out a substantial economic activity or whether its tax liability in Russia is higher than half of the tax that would be assessed on its income under Czech legislation. This will apply to Russian CFCs, as of when the end of their tax period falls after the inclusion of Russia on the EU List.
We have found no indication that Russia's inclusion on the EU List alone should affect the Double Tax Treaty between the Czech Republic and Russia.
In France, restrictive tax consequences will be triggered only after Russia is included in the French list of non-cooperative jurisdictions for tax purposes. However, this inclusion is not automatic, but requires the publication of a specific decree, published in principle on an annual basis (the last one is extremely recent, since it dates from 3 February 2023). Russia will therefore only be included in the French list when the next decree is published (probably at the beginning of 2024).
When a country is included in the French list, restrictive tax measures apply from the first day of the third month following the publication of the order. In this case, in particular, the following restrictive tax measures will be implemented with regard to Russia:
- reinforcement of documentary obligations in transfer pricing area;12
- also in the transfer pricing area, the French tax authorities will no longer have to prove a link of dependence or control between a French company and a Russian company in order to be able to challenge the transfer pricing applied between these two companies;13
- reinforcement of the anti-abuse mechanism for legal entities (CFC rules). A French company receiving passive income from a Russian company will no longer be able to deduct from its corporate income tax the withholding tax withheld by the Russian company;14
- facilitated application in the future of the anti-abuse mechanism for physical persons providing that any physical person domiciled in France who holds, directly or indirectly, at least 10% of the shares, stocks, financial rights or voting rights in a legal entity – legal person, organisation, trust or comparable institution – established or constituted outside of France and whose assets are mainly composed of financial and monetary assets, is taxable in France on the basis of her portion of the profits or positive incomes of this entity when it is subject to a privileged tax regime. Indeed, the 10% holding is presumed when the individual has transferred assets or rights to a legal entity located in a non-cooperative jurisdiction for tax purposes (FGTC, art. 123 bis, 4 ter). In addition, in application of article 123 bis, 3 al. 2 of the FGTC, a minimum tax base will be applied; and
- introduction of stricter conditions for the deductibility of charges for payments made by a physical or legal person domiciled or established in France to physical or legal persons domiciled in Russia.15
As Russia has been added to the EU List because it has not respected its commitment to modify its harmful preferential tax regime for "international holding companies", it will be added to the French list in application of article 238-0 A, 2 bis-2° of the FGTC (and not because Russia would facilitate the creation of offshore structures or arrangements intended to attract profits that do not reflect a real economic activity in Russia in application of article 238-0 A, 2 bis-1° of the FGTC). Thus, payments (in particular interest, dividends, fees, royalties) from French sources to Russia will not be subject to the 75% withholding tax in France.
The inclusion of Russia in the EU List alone does not affect benefits from the Double Taxation Treaty between France and Russia in relation to taxation in France. The inclusion of Russia in the French list of non-cooperative jurisdictions is quite unlikely as long as the Double Taxation Treaty between France and Russia remains in place.
In Germany, restrictive tax consequences under the German Defence against Tax Havens Act will be triggered with regard to Russia once Germany has adjusted its national list of non-cooperative tax jurisdictions respectively.
Should the German list be adjusted in the year 2023, the following defensive tax measures of the German Defence against Tax Havens Act will take effect as of 2024:
- the benefits of the Double Taxation Treaty between Germany and Russia are denied;
- the non-resident tax liability of companies and individuals resident in Russia is expanded to include the following income (provided that the underlying remunerations constitute deductible operational expenses): income from financing relationships (except for certain bearer bonds and similar debt instruments tradable on a recognised stock exchange), insurance and reinsurance premiums, provision of other services and trading in goods (this income source category is unclear and controversial) and renting and leasing or a sale of rights registered in a public German book or register. This income is subject to a 15% withholding tax;
- CFC-taxation extends to apply also to so-called active income (i.e. not only to passive income as previously) of German-controlled (i.e. more than 50% voting rights/participation) Russian subsidiaries that are income taxed at less than 25%, which is generally the case as the Russian profit tax rate is 20%); and
- extended records concerning business operations and shareholdings in Russia (including information on the nature and scope of business, contracts, functions performed and risks assumed, business strategies, market and competitors, shareholders of the respective business partners, etc.) shall be prepared annually for submission to the tax authorities.
In addition, the following tax consequences will become effective at later dates (as long as Russia remains on the German national list):
- as of 2026 – profit distributions (dividends) and capital gain from Russian participations are, in general, fully taxable (i.e. the usual tax exemptions and tax relief (95% tax exemption according to Sec. 8b Corporate Income Tax Act, treaty/participation privileges, 40% tax exemption for partial income procedure and the flat tax rate of 25%) are no longer granted), unless such income has already been subject to other defensive measures; and
- as of 2027 – non-deductibility of business expenses incurred in connection with operations or participations in Russia, unless such expenses are attributable to taxable income (incl. under CFC rules) which corresponds to the respective expenses.
In Luxembourg, the inclusion of Russia in the EU List has the following consequences:
- Luxembourg companies must disclose any intragroup transactions made with related enterprises located in Russia, on their annual tax returns. The EU List should be taken into account as it stands at the end of the relevant operating year. Details on these transactions, including in particular the total amount and the statement of income and expenses related to such transactions, as well as the statement of claims on and debts to such companies must be kept at the disposal of the Luxembourg tax authorities;16 and
- starting from year 2024, if Russia remains in the EU List on 1 January 2024, the tax deductibility of interest and royalties due to a related party established in Russia will be subject to a higher burden of proof. Interest and royalties will be deductible only if the taxpayer provides evidence that the transaction was made for valid business reasons that reflect the economic reality.17
The inclusion of Russia in the EU List alone does not affect benefits from the Double Taxation Treaty between Luxembourg and Russia in relation to taxation in Luxembourg.
In Poland, the inclusion of Russia in the EU List, in particular, has the following consequences:
- the Polish CFC regulation automatically applies to a company established in Russia, regardless of specific additional conditions (e.g. the minimum participation or minimum taxation). In principle, Polish entity will be obliged to pay 19% tax on income obtained from Russian entity;18
- tax on shifted profits – in the case of payments made to Russian entity being related party (which is not CFC to Polish entity), so called special 19% CIT on shifted profits may be imposed on the Polish paying entity;19
- from 2022 Poland introduced special preferential tax regime for "holding companies", which will not be applicable for dividends and sale of shares in Russian subsidiaries;20 and
- taxpayers which are obliged to publish information on realisation of tax strategy will be also obliged to cover information on tax settlements with Russian entities.21
More consequences would be applicable, if Russia is to be introduced on Polish domestic list of non-cooperative jurisdictions for Polish tax purposes. In particular, with regard to some "capital gain" types of repayments made by Polish entities to Russian entities there is a risk that Polish entities would be upfront obliged to withhold 19% tax of the amount of the payment made.22
A clarification from Polish tax authorities would be helpful to ascertain whether the Double Taxation Treaty between Poland and Russia will remain unaffected.
In Spain, domestic restrictive tax rules, all of them of an anti-abuse nature, would generally apply with regard to operations involving Russia, once the Spanish national list of "non-cooperative" jurisdictions is amended23 such that Russia would eventually be listed by Spain as tax haven territory, subject in any case to the Spain-Russia Double Tax Treaty whose provisions would prevail, in case of conflict with any domestic rules. Note also that the Spanish legislator has in recent years consistently increased the number of anti-abuse references in respect of tax haven jurisdictions and that it is likely that further anti-tax haven rules may be added in the future and apply to Russia if the Spanish blacklist were amended to include it.
Amongst others, the main domestic provisions would, in particular, be the following:
- non-deductibility for Spanish taxpayers under CIT, of the relevant provisions, if applicable, foreseeing the depreciation in the value of shares or of debt instruments held by the Spanish corporate taxpayer relating to Russia in certain cases;
- non-deductibility for Spanish taxpayers, under CIT, of expenses related to services corresponding to transactions directly or indirectly executed with persons or entities resident in Russia, or paid through persons or entities resident in Russia, save proof by the taxpayer that the related expenses correspond to a transaction effectively realised;
- all transactions with Russian entities would require to be valued under arm's-length rules irrespective of whether a related entity relationship exists;
- exclusion of the application of Spain's Participation Exemption Regime (95% exemption under Spanish CIT) on dividends and capital gains derived from qualifying shareholdings in Russian subsidiaries by Spanish corporate taxpayers;
- exclusion of the application of Spain's exemption under Spanish CIT of profits obtained by a Spanish corporate taxpayer through a foreign Permanent Establishment in Russia.
- exclusion of the application of Spain's special Patent Box regime (tax base reduction of income derived by the Spanish corporate taxpayer from the assignment of certain intangible assets), where the assignee is a resident of Russia;
- exclusion from the Special Tax Neutrality Regime providing the tax deferral under PIT, CIT or Non Residents Income Tax applicable to individual, corporate or non-resident shareholders in business reorganisations where a Russian entity participates in the reorganisation;
- exclusion from the non-taxation in Spain of dividends distributed to or capital gains derived by Spanish holding companies subject to the special holding company ("ETVE") regime where the shareholder is a resident of Russia;
- presumption, save proof to the contrary by the Spanish taxpayer, that the relevant activity, taxation and income requirements are met by a foreign subsidiary resident in Russia for subjection to Spanish CFC rules; and
- exclusion of the exemption under Non-Residents Income Tax of gains derived in Spain by Russian non-resident taxpayers from shares listed in the Spanish stock exchange.
Benefits from the Double Taxation Treaty between Spain and Russia will remain unaffected
Tax Implications Triggered by the Russian List
The Russian List is supposed to include jurisdictions that provide for preferential tax regime and do not require disclosure of information relating to finance transactions. The main purpose of "black-listing" is to disallow Russian tax-resident companies to apply reduced tax rates and exemptions with regard to income from investments in "black-listed" jurisdictions and to restrict legal entities from such jurisdictions from investing in certain segments of the Russian economy.
Until recently, the Russian List included 41 jurisdictions, mostly those commonly known for minimal or no corporate taxation (amongst others, e.g. the UAE). With the latest revision (effective from 1 July 2023), it has been enlarged to 91 jurisdictions to include all countries that Russia regards as "unfriendly" (the EU Member States, countries of the EEA, Switzerland, the United Kingdom (with the Crown Dependencies and British Overseas Territories), Australia, Canada, Japan, Singapore, South Korea, the USA, etc.).
The biggest burden of the enlarged Russian List will be on Russian businesses that maintain a presence and operations in "black-listed" countries. Operations involving legal entities in "black-listed" countries could have, in particular, the following implications:
- for taxation of Russian tax-resident companies:
- transactions with residents of black-listed jurisdictions, whether related parties or not, insofar their annual value exceeds 120 m. rubles (appr. US$1.5 m.), are subject to transfer pricing control (including transfer pricing documentation and reporting);
- income received on investments in legal entities resident in the black-listed jurisdictions, whether in the form of dividends or capital gains, are disqualified from participation exemptions (and thus are taxable at a normal rate of 20% or for dividends – 13%);
- CFC tax exemptions do not apply with regard to (sub)holding companies in the black-listed jurisdictions;
- with regard to domestic preferential tax regime for "international holding companies" re-domiciled in one of Russia's special administrative districts and their non-Russian investors:
- dividends and capital gains derived by such "international holding companies" on their investments in the black-listed jurisdictions are disqualified from participation exemptions;
- dividends (from non-public companies), interest and royalty paid to investors tax-resident in the black-listed jurisdictions are disqualified from preferential (reduced) withholding tax rates under the domestic rules (the respective investors may however still apply for double tax treaty relief if applicable).
The Russian List has no effect on the application of Russia's double tax treaties.
The suspension of Russia's double tax treaties is nevertheless reported as still being on the agenda of the Russian Government.24 The suspension could however possibly concern selected articles (e.g. dealing with passive income) rather than a treaty as whole.
Since February 2022, the Russia-Latvia double tax treaty is the only one terminated. In addition, Denmark is reported to have taken steps to prepare for termination of its double tax treaty with Russia.
1 Council conclusions on the revised EU list of non-cooperative jurisdictions for tax purposes 2023/C 64/06. BVI, Costa Rica and Marshall Islands were also added, a total of 16 countries being now on the list.
2 "Press release on the Russian Foreign Ministry and the Russian Finance Ministry's initiative to suspend double taxation avoidance agreements with unfriendly countries" dated 15 March 2023. The list of countries "committing unfriendly actions against Russia and Russian persons" was adopted by Government Order No. 430-r dated 5 March 2022.
3 List of states and territories that provide for preferential tax regime and do not provide for disclosure and provision of information when conducting financial transactions (offshore zones), approved by Order of the Russian Ministry of Finance No. 86n dated 5 June 2023.
4 The Russian tax regime for "international holding companies" was introduced in 2018, with the aim to facilitate the re-domiciliation of companies held abroad by Russian persons into Russia's special administrative districts in Kaliningrad and Russky Island in the Far East.
5 Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.
6 Directive (EU) 2021/2101 of the European Parliament and of the Council of 24 November 2021 amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches. It generally applies to multinational groups with consolidated turnover over EUR 750 million, in relation to financial years starting on or after 22 June 2024.
7 Article 307, § 1/2, of the Belgian Income Tax Code 1992, "BITC".
8 The combined provisions of Articles 198, 10° juncto 307, § 1/2, BITC.
9 Article 185/2 BITC.
10 Article 203, § 1, 1°, third dash, BITC.
11 Article 354, § 1st, BITC.
12 Fiscal Procedure Guide (FPG), art. L 13 AB.
13 French General Tax Code (FGTC), Art. 57.
14 FGTC, Art. 209 B, 5.
15 FGTC, art. 238 A.
16 Circular issued by the Luxembourg tax authorities dated 31 May 2022 (L.I.R. n° 168/2 - L.G. - A n° 64).
17 Article 168 5. c) of the income tax law.
18 Article 24a, sec. 3, point 1 of the Polish CIT Act.
19 Article 24aa, sec. 15 of the Polish CIT Act.
20 Article 24m, sec. 1 of the Polish CIT Act.
21 Article 27c, sec. 2 of the Polish CIT Act.
22 Article 26, sec. 1m of the Polish CIT Act.
23 The effective dates below are estimated based on the assumption that the Spanish list of "non-cooperative" jurisdictions will be aligned with the EU List before the end of 2023.
24 If a double tax treaty is suspended, a non-Russian corporate recipient of Russian-sourced income will be taxed in accordance with Russian domestic laws, at the rates of 15% on dividends; 20% on capital gains from disposal of "immovable property-reach" shares (with deduction of historical acquisition cost if properly documented); and 20% on interest, royalty and so-called "other income".
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